Reserve accumulation and monetary sterilization in Singapore and Taiwan

Abstract

Asian economies have embraced the globalization of production, trade and capital flows. One dimension of contemporary globalization has been the heavy exchange rate management by, and rapid and massive stockpiling of, foreign exchange reserves in Asia. This article undertakes an empirical investigation to assess the extent of de facto sterilization and capital mobility in Singapore and Taiwan using quarterly data between 1990 and 2008. Our empirical results suggest that, since, 2001 both Singapore and Taiwan have a high degree of – but not perfect – de facto capital mobility. To date, this high-effective capital mobility has not undermined the ability of the central bank in either economies to sterilize their respective foreign exchange intervention but may make the process increasingly difficult over time.